A Comparative Assessment of Competitiveness: India Trails its Asian Competitors

The competitiveness question has become central in the current global landscape, marked by growing uncertainty around U.S. tariff policies. For India, it is imperative to address core competitiveness issues—not only to face emerging challenges but also to seize potential opportunities. The first step in this direction is a comprehensive assessment to identify and understand the existing gaps.

Competitive Index

A recent working paper by the Centre for Social and Economic Progress (CSEP) computes a Competitiveness Index (CI) that compares India with its key Asian peers—Indonesia, Malaysia, Thailand, and Vietnam. The index draws inspiration from Porter’s Diamond Model (PDM) and is structured around six core pillars: Factor Conditions, Demand Conditions, Related and Supporting Industries, Firm Strategy and Structure, Regulatory Quality, and Global Trade Policy. Each of these pillars is composed of relevant sub-components that align with the broader definition of the pillar. In total, the index includes 36 components, most of which are drawn from the World Bank’s Enterprise Survey, with additional data sourced from the ILO, WDI, WITS, and other relevant databases.

The CI analysis finds that, among the countries studied, India and Indonesia are the two least competitive countries.

CI Rankings

The CI analysis finds that, among the countries studied, India and Indonesia are the two least competitive countries. The top three spots are occupied by Malaysia, Vietnam, and Thailand (Figure 1).

Figure 1

Of the six pillars studied, India ranks poorly in two: firm strategy, structure, and rivalry; and global trade policy. India is among the lowest in three other pillars: “factor conditions”, “related and supporting industries” and “regulatory quality.”

• Of the six pillars studied, India ranks poorly in two: firm strategy, structure, and rivalry; and global trade policy. India is among the lowest in three other pillars: “factor conditions”, “related and supporting industries” and “regulatory quality.”
• The only pillar where India is not among the lowest rankers among the five countries studied is “demand conditions.”
• In the factor conditions pillar, India performs poorly overall, with gaps evident in Research & Development (R&D), access to finance, and land.
• India’s better performance in the demand conditions pillar is largely due to its large domestic market, which is a crucial subcomponent of this pillar.
• In the related and supporting industries pillar, India’s low rank is attributable to high import tariffs on intermediate goods.
• India’s low rank in the firm strategy, structure, and rivalry pillar is primarily driven by a high degree of firm concentration in Indian industry.
• For the regulatory quality pillar, India’s low rank is due to issues with customs and trade regulations, and tax administration.
• India’s lowest rank in global trade policy is primarily due to its high Most Favoured Nation (MFN) tariffs and its absence from major trade agreements.

Industry Discussion

These gaps, highlighted by the Competitiveness Index, are echoed by industry voices. Indian firms acknowledge their limited investment in R&D and an overreliance on domestic demand. For instance, the apparel sector remains focused on cotton-based garments, even as global demand increasingly shifts toward synthetic apparel. This inward orientation hampers innovation, limits economies of scale, and delays quality upgrades. Additionally, restrictive labour laws create disincentives for firm expansion, encouraging businesses to remain small, contributing to the persistent issue of a ‘missing middle’ in India’s industrial landscape.

Drawing on the findings of the Competitiveness Index and insights from industry consultations, the paper identifies key priority areas within the Porter’s Diamond Model framework that India must focus on to strengthen its export competitiveness (Figure 2).

Figure 2: Key Priorities for India’s Competitiveness Strategy

Sector Specific Priorities

Industry discussions also revealed sector-specific priorities that must be addressed for each sector to reach its full potential.

Apparel: Boost R&D for man-made fibre (MMF) innovation, diversify into Man-made fabrics (MMF) based apparel to meet global demand, liberalise import duties on MMF, and develop integrated local supply chains.

Auto-components: Scale up production, reduce import duties on critical inputs, and use FTAs to resolve international standards-related barriers.

Electronics: Expand beyond smartphone exports by scaling production of other electronic items; liberalise duties on parts and components.

Pharmaceuticals: Increase R&D investment for drug innovation, co-locate labs, companies, and training centres, and use FTAs to harmonise quality standards with trading partners.

To expand the manufacturing sector from 13 per cent to 25 per cent of GDP over 10 years, it needs to grow at 13.6 per cent per year. This growth cannot be achieved by serving only the domestic market, and Indian manufacturers have to rely on exports

Based on the identified priority areas, the paper outlines policy directions under four broad categories: lowering import tariffs, engaging in deeper FTAs, enhancing regulatory quality, and fostering technology adoption. While past policies have attempted to address these challenges, they have not delivered the desired outcomes for the manufacturing sector.

The current global landscape offers India a timely opportunity to correct its competitiveness deficits. More critically, it provides a chance to meaningfully integrate into global value chains—an area where India has historically lagged. To expand the manufacturing sector from 13 per cent to 25 per cent of GDP over 10 years, it needs to grow at 13.6 per cent per year. This growth cannot be achieved by serving only the domestic market, and Indian manufacturers have to rely on exports.